Questions and Answers

Fotis Grontas & Associates

What is a limited company?

A limited company under UK law is one registered at Companies House. It must operate within the Companies Act 2006 and is governed by its own articles of association (companies registered before 1.10.2009 may have both a memorandum of association and articles of association). There are different types of limited company but they all have these qualities.

Once registered a company has corporate personality. It is a legal entity (or legal person) with its own legal rights and obligations, separate and distinct from those of its members and directors. The company’s property is its own and is not treated as belonging to the company’s shareholders and directors. The company itself can enter into contracts, employ people, sue and be sued and can be liable if it commits criminal offences. This has many practical implications.

Every company has a constitution in the form of articles (or, for older companies, memorandum and articles).

A company must have both directors and members. (Members are shareholders unless the company is limited by guarantee).

The key feature of a limited company is that it offers limited liability to its members. The company (as a separate legal entity) is liable for its debts and the members and directors are not personally liable (unless they have acted wrongly in some way). The members’ liabilities are limited to paying to the company the amount they have agreed to pay for their shares. This may be a purely nominal amount, for example if the shareholders have each taken one £1 share.

Most companies limited by shares are trading companies, but there are many different types of registered companies and they are used for many different purposes, some of which have nothing to do with running a business.

Although it is possible for companies to be created by royal charter (“chartered companies”) or by Act of Parliament (“statutory companies”), practically all modern companies are created by registration at Companies House. Nearly all companies are now registered on-line, though it is still possible to do it by submitting paper documents.

Limited liability

The basis of limited liability is that all debts incurred by a company are the company’s liabilities and are not directly the legal liabilities of the shareholders or of the directors of the company. The company is a separate legal person from its shareholders and the directors. The company incurs debts in the course of its business and only the company is liable for those.

In a company limited by shares, the shareholders’ obligation is to pay the company for the shares they have taken in it. Once the shares are fully paid for (and this would usually be the case with a private limited company) no further money is payable by the shareholders.

The members of a company limited by guarantee are bound by a guarantee in the company’s memorandum of association requiring them to pay the company’s debts up to a fixed sum, which is usually £1.

The directors incur no personal liability as all their acts are undertaken as agents for the company. However, there are certain circumstances where liability may be imposed by the court, particularly in respect of wrongful or fraudulent trading. Also some potential creditors of a small limited company may ask the directors to give personal guarantees of the money owed to them. This is routine if a small company requests a bank loan or overdraft or when taking a lease of premises.

Being able to set up a limited liability company quickly, cheaply and easily is an important incentive for those contemplating starting a business venture. It means that personal assets, such as the entrepreneur’s home or other wealth, are not put at risk. If the business fails, the owners can walk away from its debts. Only any capital committed to the company as share capital is liable to be lost if the venture fails. The UK is one of the easiest places in the world to set up a company. It is quick (on-line registration allows companies to be registered within hours), cheap (typically between £50 and £150 for a professional registration service) and easy (with the registered details being submitted on a website form).

Sometimes the easy availability of limited liability is abused, exploited by those who want to set up a business, run up debts and never pay them. Such conduct is fraud, if done deliberately, or may be wrongful or fraudulent trading. Apart from civil liability and criminal sanctions, someone behaving in this way may be made subject to a directors disqualification order. Nevertheless, there are sometimes complaints that it can be too easy for people to act in this way and avoid any legal recourse, at least for a while.

Types of Companies

Private company limited by shares (Limited or Ltd)

The standard trading company and by far the most usual type of company. It confers full limited liability on its members, must have at least one director and one shareholder. Check that you have all the required information and register on line now.

Public limited company (PLC)

For companies that want to sell shares to the public. A PLC must have at least two directors, two shareholders and a company secretary. Its initial share capital must be at least £50,000 of which at least 25% must be paid up on incorporation. Before a PLC can conduct any business, it must make a return to Companies House stating that it has raised its minimum share capital and received from Companies House its trading certificate. Check that you have all the required information and register on line now.

Limited liability partnership (LLP)

Widely used for small business and professional firms. A hybrid between a company and a partnership. Check that you have all the required information and register on line now.

Property management company

Often set up where a property is divided into units, e.g. flats in a building, to manage the common parts and, often, the freehold of the property, the articles specify the property address and have special rules. Such a company may be limited by shares or limited by guarantee. Check that you have all the required information and register on line now.

Right to manage company (RTM)

A special company where leaseholders are exercising rights under the Commonhold and Leasehold Reform Act 2002. Check that you have all the required information and register on line now.

Standard company limited by guarantee

Most companies limited by guarantee have specially drafted articles, a service provided by Community Companies. Alternatively, you can register such a company using our standard articles. We provide two alternative sets of articles:

Company limited by guarantee that allows profits to be paid to its members and salaries and fees paid to its directors, and Company limited by guarantee that prohibits the payment of profits to members, requires any surplus assets on winding up to be given to charity and prohibits the payment of salaries or fees to its directors.

Company limited by guarantee with special articles

Community Companies provides a specialist service for this type of company

Charitable company limited by guarantee

Charitable companies must have specially drafted articles, Community Companies provides a specialist service for this type of company.

Community Interest Company (CIC)

It is impossible to register a Community Interest Company electronically and specialist drafting is required. Community Companies provides an expert service for this type of company.

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